Warren Buffett , theCEO of
Berkshire Hathaway (NYSE: BRK-A)
, is currently worth about $44 billion, according to Forbes' list
of the world's richest people. This makes him the world's
third-richest person, behind Bill Gates and Carlos Slim.
Buffett is famous for some greatstock picks over the years --
Coca Cola (
American Express (
, each having increased more than 110% in the past 10 years
But the Oracle of Omaha is also well known for avoiding
certaininvestments -- especially gold.
While he's is quick to point out that gold has served some
investors well, particularly during times of highinflation ,
Buffett has never warmed up to gold as aninvestment .
The answer has to do with the difference between what Buffett
calls productive versus nonproductive assets.
He considers gold a nonproductiveasset because it doesn't
produce anything of value. To illustrate this point, Buffett
proposed this thought experiment in his 2011 letter to Berkshire
"Today the world's gold stock is about 170,000 metric tons.
If all of this gold were melded together, it would form a cube
of about 68 feet per side. (Picture it fitting comfortably
within a baseball infield.) At $1,750 per ounce -- gold's price
as I write this -- its value would be $9.6 trillion. Call this
cube pile A.
"Let's now create a pile B costing an equal amount. For
that, we could buy all U.S. cropland (400 million acres with
output of about $200 billion annually), plus 16 Exxon Mobils
(the world's most profitable company, one earning more than $40
billion annually). After these purchases, we would have about
$1 trillion left over for walking-aroundmoney (no sense feeling
strapped after this buying binge). Can you imagine an investor
with $9.6 trillion selecting pile A over pile B?
"A century from now the 400 million acres of farmlandwill
have produced staggering amounts of corn, wheat, cotton, and
other crops -- and will continue to produce that valuable
bounty, whatever thecurrency may be. Exxon Mobil will probably
have delivered trillions of dollars in dividends to its owners
and will also hold assets worth many more trillions (and,
remember, you get 16 Exxons). The 170,000 tons of gold will
beunchanged in size and still incapable of producing anything.
You can fondle the cube, but it will not respond."
So, instead of nonproductive assets such as gold, Buffett
prefers productive assets like farmland or companies that
generate enormouswealth for shareholders -- companies like
Exxon Mobil (
, Coca-Cola or See's Candy.
And he clearly explains why:
"Our country's businesses will continue to efficiently
deliver goods and services wanted by our citizens.
Metaphorically, these commercial "cows" will live for centuries
and give ever greater quantities of "milk" to boot. Their value
will be determined not by the medium of exchange but rather by
their capacity to deliver milk. Proceeds from thesale of the
milk willcompound for the owners of the cows, just as they did
during the 20th century when the Dow increased from 66 to
11,497 (and paid loads of dividends as well).
"I believe that over any extended period of time this
category ofinvesting will prove to be the runaway winner… More
important, it will be by far the safest."
This last sentence is important. Investing in productive
assets carries less risk.
That's because, in the past,irrational exuberance has caused
all sorts of nonproductive assets to suddenly skyrocket beyond
any sane measure ofintrinsic value . The run-up on the prices of
tulips in the 17th century is one colorful example.
Action to Take -- >
In contrast to the "boom and bust" cycle seen in commodities like
gold (or tulips), productive assets will never go "out of style,"
as Buffett says.
After all, people will always need goods, consume food and
require a home to live as they do now. In Buffett's own words,
"People will forever exchange what they produce for what others
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